Banking sector cheapest in UK; RBS could pay a dividend

RBS-Building-2012-700x450.jpgThe banking sector is now the cheapest sector in the UK, according to data from TD Direct Investing, with trading in banking stocks increasing by 29 per cent in 2016.

Michelle McGrade, CIO, TD Direct Investing, says UK banks are now “returning to form” having rebuilt their balance sheets after the fallout from the financial crisis, which saw banks’ share prices plummet and several suspend their dividend payments.

The five main UK banks release their annual results this week, and with dividend levels looking attractive, they “could be attractive to bargain-hunting investors” McGrade says.

In 2016, the banks paid out £10.4bn in dividends, according to Capita’s UK Dividend Monitor report last month. HSBC distributed £7.5bn, up 17 per cent year-on-year, while Lloyds – which in 2015 announced its first dividend since the Government bailout – announced a special dividend of £360m after seeing strong profit growth.

Laith Khalaf, senior Analyst at Hargreaves Lansdown, says there is potential for RBS to pay a dividend following the announcement the bank will not have to sell off Williams & Glyn. RBS shares rose 6 per cent on the news.

However Khalaf warns RBS still “has a plateful of problems to digest”.

“If RBS is relieved of the obligation to sell off Williams & Glyn, that would remove a major obstacle from the bank returning to some measure of normality, and even potentially paying a dividend, though it’s best not to count those chickens before they’re hatched,” Khalaf says. “Things are still challenging for the bank, it’s on course to report a ninth consecutive year of losses, and the light at the end of the tunnel is still obscured by US litigation and restructuring costs.”

He adds: “Low interest rates continue to present a challenge for the core business of banking across the sector. However both HSBC and Standard Chartered have benefited from currency tailwinds, as has Barclays which is also seeing restructuring starting to finally gain traction. Lloyds still remains in decent shape, though it’s the canary in the coalmine as far as Brexit is concerned, given how thoroughly it is plugged into the grass roots of the UK economy.”

McGrade says challenger banks, such as Aldermore and Shawbrook, could disrupt the banking sector, with trades in such banks up 188 per cent over 2016. Overall, she says: “banks remain an attractive investment opportunity in the long term”. She names Schroder Income, Majedie UK Equity, JOHCM UK Dynamic and Old Mutual UK Alpha as funds with a significant allocation to financials.

“[Banks] will be beneficiaries when interest rates rise from their historic lows. While the timescale for rate rises remains uncertain, an upwards trajectory seems the most likely outcome which will allow banks to increase their margins. Their profitability will also be boosted by increasing inflation. In addition, banks continue to focus on cost-cutting to deal with economic and structural challenges.”